At Supply Chain Insights, we believe that supply chain excellence can be defined as the ability to improve on a portfolio of metrics, which we call "Supply Chain Metrics That Matter." The metrics we use to identify the companies on that list are based on correlation to market capitalization and include: growth, inventory turns, operating margin, and return on invested capital (ROIC).
Although supply chain leaders are tasked with driving improvement at the intersection of cost, inventory, and customer service, nine out of 10 companies struggle to make progress in this area. When you plot those intersections, they are gnarly, and it is difficult to determine whether a company is making progress. It is for this reason that we built the Supply Chain Index. (For more details about the Supply Chain Index and its associated metrics, see "The Supply Chain Index: A new way to measure value" in the Q3/2014 issue of CSCMP's Supply Chain Quarterly.)
The winners of our second annual Supply Chains to Admire list have achieved supply chain excellence by improving on those metrics and maintaining. ("Supply Chains to Admire" is trademarked by Supply Chain Insights.) The Supply Chains to Admire analysis is a study of both improvement and performance. To make the list, companies must outperform against their peer group on those metrics while making improvements. This is tough to accomplish. As a result, only 26 companies (shown in Figure 1) make the list in 2015. The study is based on our analysis of performance from 2006 through 2014.
The best-performing supply chains will often have a Supply Chain Index value in the middle of the peer group. Why? Companies that are underperforming their peer group can make bigger leaps in supply chain improvement than can higher-performing companies that have already made significant improvements. As a result, their scores on the Supply Chain Index (the measurement of improvement) can be higher than those of a company with better results. The best-performing supply chains, then, are balancing improvement with stronger performance.
Top performance is hard to sustain. As a result, only eight of the companies we study made the list for two consecutive years. They include Audi, Cisco Systems, Eastman Chemical, EMC, General Mills, AB Inbev, Intel, and Nike. In the 2015 analysis, BASF, Colgate, Ralph Lauren, Seagate, and TSMC fell off the list due to their relative rate of improvement in the portfolio of "Metrics That Matter" for their peer group.
What makes a winner?
The journey toward supply chain excellence never depends on just a single factor. Instead, supply chain excellence is achieved through a combination of behaviors and initiatives. Here we share seven elements of success that we see most often:
1. Consistency of leadership. Top-performing companies benefit from consistency in their leadership. We find that many of those companies built supply chain organizations in the 1980s and have only had one or two supply chain leaders over the three decades of process evolution. This consistency of leadership coupled with a strong supply chain vision makes a difference.
2. Strong horizontal processes. Traditional supply chain leadership focuses on functional excellence. The winners of the Supply Chains to Admire analysis, however, have shifted their focus to building strong horizontal processes: revenue management/cost-to-serve analysis, sales and operations planning (S&OP), new product launch/product portfolio analysis, supplier development, and corporate social responsibility. This enables cross-functional orchestration against goals and the balancing of functional objectives to support corporate strategies.
3. Horizontal organizational alignment. To accomplish these goals, companies work to build teams. While the traditional functional company has alignment gaps between functions, the higher-performing companies are more aligned. The greatest challenge is for the company to align operations and commercial teams.
4. Technology implementations done right the first time. Companies like Cisco Systems, General Mills, and Intel implement new technology correctly the first time, and then their systems evolve over time. In contrast, some of their competitors have implemented technology systems two and three times without success.
5. Strong capabilities in supply chain planning and network design. To balance the portfolio of metrics and improve results, winning companies are good at supply chain planning. They actively design value networks and understand the function of inventory and the importance of buffers to manage demand and supply variability.
6. Source, make, and deliver reporting to a common leader. When procurement, manufacturing, and logistics report to a common leader, the design of the organization helps to close the gaps between functions. For a global multinational, there is also a need for a clear governance structure that defines the roles of the corporate functions, the businesses within the corporation, and the regions. This careful crafting of governance models by the supply chain team improves success rates.
7. Clarity of supply chain strategy and a clear definition of supply chain excellence. The delivery of supply chain excellence is a journey. It is not a project. The companies that are achieving the greatest success carefully define their supply chain strategy as well as the enabling technologies and processes. The various functions are charged with driving reliability. The functional leaders are aligned through joint goals to deliver the portfolio of Supply Chain Metrics That Matter.
To deliver supply chain excellence, organizations need to have a clear definition of value. While the metrics patterns can be difficult to unravel, they are very useful. To judge supply chain excellence, performance, and improvement, company results need to be assessed together with the peer group, and the analysis must be viewed over time. The performance patterns in the Supply Chain Metrics that Matter drive value. For all, their efforts must be recognized as being a journey, not a sprint.